• Dollar Hits 1.5 Year High Against Euro as Traders Focus Shrug Off Payrolls
• Improvements Persistently Seen in Eurozone Economic Data
• USD/JPY Rally Continues, Breaking 2 Year Highs

US Dollar
Non-farm payrolls have not failed us yet - it delivered a nice dose of volatility to the market once again today.  The dollar first took a nosedive on the back of the report but then managed to recuperate its losses and even hit a new 1.5 year high against the Euro by the day's end.  Non-farm payrolls were reported at 56k vs. expectations of 120k. The previous month was revised higher from -35k to -8k, which still means the overall number indicates that Katrina's impact lingers. The manufacturing sector however showed an improvement with 12k jobs added, which marks the first positive reading since May of 2005. Further good news was seen in the earnings number with the average hourly earnings jumping 0.5% vs. 0.2%, which was the highest pace of growth this year.  Average weekly hours also improved marginally while the unemployment rate dipped from 5.1% to 5.0%.  Overall, it seems that even despite the decidedly mixed results, dollar bulls have full control and are taking the data in stride.  Most interesting is the razor sharp accuracy of our Speculative Sentiment Index.  As reported yesterday, speculators were net long going into the release signaling that any rally in the EURUSD could be limited.  It seems that the most important thing at this point is that the market is focusing on income growth, suggesting that the Fed has further leeway to raise rates.  However we still caution that weak labor growth and the prospect of high heating bills still poses a risk for the US consumer, especially going into the usually critical Christmas shopping season.  In general, the mixed non-farm payrolls report leaves most of the problems unresolved which means that range trading should remain the predominant theme in the EUR/USD. 

Euro
The Euro weakened significantly today as the market concentrated on US data.  Strong Eurozone data released overnight did little to halt the charge forward by dollar bulls.  The producer price index for September rose as expected by 0.5% with the rise fueled by a huge jump in energy prices.  This eases some inflationary speculation for the European Union as the numbers do not fall uncomfortably beyond expectations as they have at other points recently, however the jump is still somewhat troublesome.  Unemployment in the Euro-zone fell to 8.4% the lowest level in almost three years, from a revised 8.5% last month and from 9% in September 2004 as the currency sharing countries began to show a slow recovery in September with sharpest improvement in seen in Spain.  Also showing a significant improvement were German factory orders which, seasonally adjusted, showed a preliminary rise of 2.8%, more than double the expected rise, after a 3.8% drop in August.  Foreign demand, spurred by the lower valued Euro, as well as spending by domestic companies drove the rise in production.  Being that Germany is the Euro-zone's largest economy, strong signs of recovery in the country signals good things to come for the entire Euro-zone.  As the economy strengthens, prospects of a rate hike by the European Central Bank increase.  The ECB announced today that demand for business loans rose in the third quarter for the first time in almost two years, another strong indicator of a recovery.  Following ECB President Jean-Claude Trichet's comments yesterday that the bank “stands ready to move at any time” to raise rates from the six-decade low 2%.  As the US Fed consistently continues to raise rates, traders are becoming more conscious of interest rate differentials between the currencies.  With the Euro holding one of the lowest rates, the dollar repeatedly looks more desirable than the Euro.  An economic strengthening would not only pull up the currency in its own merit but would allow for a closing of this rate gap.

British Pound
In British news today, house prices for October remained unchanged from September according to the UK Home Builder's Organization.  Prices in the housing market have risen in the past four months, keeping up hopes that a recovery was imminent.  However, this trend was broken in October giving way to speculation that the recovery cannot be sustained at this time.  Prices began to rise after the rate drop in August, but at the same time consumer confidence fell, unemployment rose, and economic growth slowed causing the gains in housing to quickly run out of steam.  This release conflicts with data released 3 days ago by Nationwide Building Society, which posted a 1.3% rise in prices, the highest increase in 15 months.  Both releases are in agreement though that it is too early to say whether a recovery is, or was, taking place.  Analysts detail that they would not be surprised to see a drop in prices over the next few months as consumers have scaled back spending and prices need to drop back into the affordability range.  Also, a lagging housing market, amongst other things, has pushed economic growth back to 1.5%, the lowest since 1993.  The negative releases continue to put pressure on the Bank of England to lower rates again in attempts to help the stumbling economy.  Policy makers are reluctant to do anything that may push up inflation however which inflationary figures are above the target 2%.  Investors at this point have essentially abandoned hope of a rate decrease and the bank is expected to stay rates at its next meeting, not disturbing economic health or inflation.

Japanese Yen
The dollar skyrocketed once again against the Japanese Yen.  The trend remains exceptionally strong as traders continued to capitalize on the growing rate differential between the countries.  Household spending in Japan rose by 1% from September 2004, the first increase in 6 months.  This jump came as a surprise since economists predicted a drop.  Spending actually dropped from August to September by 0.4%, but the numbers came in better than the expected drop of 1.4%.  This is the first decline in two months.  Spending has been buoyed by rising wages and a quickly recovering economy.  Consumers may not have spent as much in September as in August die to a change in season with the first month of fall being a traditionally slower sales month as late-summer incentives end.  Oil prices also shot up during September causing a shock to household budgets.  Sales have consistently been higher than last year however as Japanese consumers break their traditionally frugal spending habits as the employment market booms.

Kathy Lien is the Chief Currency Strategist at FXCM.